In Notice 2018-40, the Service published the inflation adjustment factor for the credit for carbon dioxide sequestration under Section 45Q for calendar year 2018. The Notice also announces the amount of credit utilization as of May 11, 2018.

Background

Section 45Q provides a general business tax credit for CO2 sequestration. The credit is available to any taxpayer that captures qualified CO2 at a qualified facility and disposes of it in secure geological storage within the United States. If the qualified CO2 is not used as a tertiary injectant in a qualified enhanced oil recovery (EOR) project, the base credit rate is $20 per ton (Section 45Q(a)(1)). If the qualified CO2 is used as a tertiary injectant in a qualified EOR project, the base credit rate is reduced to $10 per ton (Section 45Q(a)(2). The credit is adjusted for inflation.

The credit applies only to qualified CO2 that is captured and disposed or used as a tertiary injectant within the United States or a US possession.

Under Section 45Q(e), the credit applies only through the end of the calendar year in which the Service, in consultation with the Environmental Protection Agency, certifies that the credit has been claimed for 75 million metric tons of qualified CO2. A taxpayer claiming the credit for a tax year must file an annual report with the Service disclosing the amount of qualified CO2 for which the credit has been claimed. The annual report for a tax year is due by the end of the second calendar month following the month in which the return was due (including extensions). In Notice 2018-40, the Service announced that, based on taxpayer reports filed with the Service as of May 11, 2015, the Section 45Q credit had been claimed for 59,767,924 tons of qualified CO2.

Inflation adjustment

The Notice sets the inflation adjustment factor for calendar year 2015 at 1.1437. This adjusts the Section 45Q credit for calendar year 2015 to $22.87 per metric ton of qualified CO2 under Section 45Q(a)(1) and $11.44 per metric ton of qualified CO2 under Section 45Q(a)(2).

Tax credit utilization

The Notice states that, based on taxpayer reports filed with the Service as of May 11, 2018, the Section 45Q credit has been claimed for 59,767,924 tons of qualified CO2. Thus, the credit may be claimed for an additional 15,232,076 tons of qualified CO2 before the Service will be required to certify that the 75-million-metric-ton limit has been reached.

Implications

The IRS has increased the Section 45Q tax credit for sequestered CO2. We remind all taxpayers claiming this credit that they should maintain independent support showing that the CO2 was sequestered in secure geological storage. Also of note, the Balanced Budget Act of 2018 significantly expanded and liberalized the Section 45Q credit. The credit may now be available to a broader class of taxpayer and at higher rates than was previously the case for projects that are placed in service after February 9, 2018.

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